1.3 Motivation

The motivation for this research is entirely driven by the practical issues and concerns I experienced in the logistics industry. Before 2012 I worked in an American PC manufacturing company based in China, and was responsible for architecting logistics projects and systems. It was at that time when I was deeply impressed by the complexity to manage logistics, and how difficult it is to maintain the logistics operations efficiency, the importance of which the company strongly emphasized and is striving for excellence.

Unfortunately, logistics was often found to be the biggest constraint for this company, along with its extended supply chain, reflected by the high cost, long order delivery time, frequent capacity shortages or low utilization, unpredictability in demand and unstable service, etc. These logistics issues significantly hampered the other operations in the supply chain and prevented the company from retaining leadership in what was a hyper-competitive marketplace.

More specifically, I was able to observe very low utilization and delays in the daily logistics operations. This directly incurred high shipping costs for the company itself and poor delivery service for customers. The main reason for this low utilization was a lack of sufficient scale. For example, in order to maintain the delivery frequency and lead time commitment for customers, the company had to ship out orders every day regardless of whether the trucks, containers or airplane space were being efficiently used. Furthermore, transportation solutions such as rail often required a minimum volume threshold to provide the service. This led to difficulties in attracting sufficient volume in a very short time window and hence delayed the transportation. High order volatility and the unbalanced ordering pace and size from customers were also among the root causes for low utilization and delays. Logistics capacity needed to be planned in advance according to a forecast, but high demand variations led to the adoption of a conservative and high buffer strategy, with slack capacity being retained in order to cope with uncertainty. Capacity in the logistics marketplace, however, is unlike inventory that can be carried over: it is only usable for a specific time and if it is not used it perishes, causing frequent waste and low utilization. On the other hand, unbalanced order waves can pressurize the supply of capacity. Customers tended to release big orders, often at the end of the order receiving cycle, creating extreme challenges in preparing capacity in both production and logistics. In these circumstances supply shortages were also inevitable, causing shipment delays.

These problems are deeply rooted in the current supply chain and logistics configurations and show that using the traditional and internal optimization methods are difficult and unlikely to lead to significant improvements. By analysing the freight flow network, however it was found that many other manufacturers’ outbound logistics networks were in parallel and were highly overlapped. These manufactures were all centrally clustered in one part of China producing and shipping orders to the same regions or the same customers. Many of them were also in collaborative relationships in supply and manufacturing (the so called “vertically clustered supply chain”). The question arising, therefore, is that if they can be clustered for manufacturing and supply, why can they not be clustered to promote collaborative outbound logistics? In fact, many opportunities for collaboration in logistics that could fundamentally change the way the current logistics system behaves have been identified. Prior to I left this sector, however, practical implementation of new paradigms were only just beginning with a few trials in which I was involved. From the success of these trials, however,it was evident that this new style of logistics management had much potential and it was this realization that encouraged the decision to undertake further study of this newer kind of collaborative logistics system.

From a broader perspective, the research also seeks to make a small contribution to the development of the logistics industry in China. As can be seen from Figure 1.2,when comparing the logistics cost in relation to the GDP of China, USA and Japan (the three largest economies), it is noticeable to see that China spends more than double the amount on logistics to support its GDP growth. The high cost percentage (near 1/5 GDP) strongly indicates the low levels of efficiency in the current logistics operations within the various industries constituting the Chinese economy. The problems of energy wastage, traffic congestion, and environmental pollution are becoming a serious and terrible fact in China, despite, or perhaps because of, its rapid growth.Poorly implemented logistics have contributed greatly to the growing severity of these issues, and this needs to be addressed urgently. Realistically, the Chinese economy has to change its growth pattern from extensive to intensive, increasing quality rather than quantity, as is always stressed by the state government. This requires logistics as the key player in the economic activities to become more intensive rather than extensive type of development. The concept of logistics horizontal collaboration strongly fits with this strategic goal since it is much emphasized on maximizing the utilization of resources in the current system without or reduces the need for adding new supplies/resources. The Chinese Ministry of Commerce made a clear official statement in early 2013 to encourage research and practice in collaborative and synchronized distribution, which is a major type of horizontal collaboration in logistics and freight transport, for the purposes of cost reduction and efficiency improvement.

In the meantime the rapid development of some industries in China has imposed significantly greater challenges for logistics. One typical example is the E-commerce industry. The pace of the development of E-commerce has become explosive since 2010 and it is now among the largest, as well as the most advanced, online marketplaces in the world. With the hyper-growing population of customers shopping online every day, logistics infrastructure and delivery services have become a terrible constraint. People often have to wait for their orders to be delivered for more than one week, forcing the industry players to begin huge investment in E-commerce logistics.The dramatic growth in E-commerce businesses has led to an equally dramatic increase in the number of logistics companies offering delivery services, but most of these are SMEs with just one or two trucks/vans. The high degree of fragmentation is the current situation for E-commerce logistics. This has resulted in severe competition based on low prices, which has in turn caused the E-commerce logistics to have very low profits, inefficient and poor service performance among E-commerce logistics providers. To fundamentally change this situation requires fundamentally different thinking. Logistics companies, particularly small companies, need to be more collaborative rather than competitive to consolidate their supply power so that they can explore better the economy of scale in their operations to save costs, and to consolidate their distinguishing capabilities to offer customers much better service.Thus because of the high number of small logistics companies and the high level of fragmentation, logistics horizontal collaboration has a great potential to explore and bring the potentialities of these logistics SMEs into full play.

Furthermore, the recent communication with industry professionals has indicated that the developments of E-commerce marketplace in China have triggered a number of new trends that could profoundly affect the logistics styles, which include:

● Order immediacy (E-commerce logistics is now putting an unprecedented emphasis on delivery speed. Big companies are challenging to achieve delivery within 24 hours, or less).

● Omnichannel retailing (creating more channels for marketing, order receiving and logistics delivery paths and modes. This leads to smaller and fragmented orders, and further complexity to connect logistics to the various sales channels. Horizontal collaboration can be helpful for sellers to aggregate and deliver these small batch orders in economical and flexible ways).

● Online to offline integration (O2O). (Online retailers are developing strategic horizontal partnership with offline retailers to position inventory of goods nearest to customers, and explore alternative ways for sending and receiving parcels. A notable partnership example is seen between Walmart and JD.com).

● Cutting out the middle man and reducing the total logistics cost. Goods of origin shippers (factories/farms...) conduct multi-batch-small-volume deliveries directly to the community-based retailing outlets, rather than shipping to central and regional warehouses for order fulfilment. (To shift to such delivery pattern, it requires intensive horizontal collaboration between shippers for trunk, urban and last mile transport to ensure cost efficiency and service requirements).

● Asset light E-commerce sellers seek industry wide alliances to build open and shared logistics systems (e.g. Cainiao Network).

● Asset heavy E-commerce sellers with strong self-building logistics (who also declared themselves as “logistics companies”) have begun to open their transport assets and network for social use, and with equal terms (e.g. JD.com).

● Business crossover has become prevalent. E-commerce companies are investing massively in building up their own logistics system nationwide, while traditional logistics providers are also building up their own E-commerce, taking full advantage of their robust logistics system. All have the target to enhance the customer shopping experience, a great part of which is tied to the service quality in logistics.

● New and non-traditional entrants (typically technology and internet companies) have started to challenge the traditional logistics styles. They have brought many new technologies into the marketplace (e.g. cloud computing/Internet of Things/drones/driverless cars), business models (e.g. crowdsourcing/sharing economy/social E-commerce), and mind-sets (e.g. Internet Thinking, User Focus, Iterative Thinking, Craftsmen Spirit, Minimalism).

These new trends have brought many new changes and challenges for the management of logistics operations, but on the other hand they have also served to stimulate new thinking and innovations to transform the traditional approaches to logistics. Logistics horizontal collaboration represents a particularly promising aspect of these new opportunities. bcCil75aipa54up0hPqvkwcnmMv1oiL4bp6dtYWM0hPS5rp4Kx8Er+W/4D/0oYqX